US Dollar oversold hit a 40-year high said Morgan Stanley on Friday, adding that it had changed its USD stance from “sell” to “tactically neutral”.

Recall that this Monday I wrote that MS analysts changed their view on equities stating they are poised for a small but non-critical bearish pullback. By changing their view on USD, Morgan Stanley may support its case for meaningful equity sell-off, since pullback in some assets leads to an upside in others. Since selling stocks means exchanging it to a currency, the demand for the latter may increase which is reflected in increased scope for upside according to the bank analysts.

On Thursday, we saw a weekly update on initial and continuing jobless claims, which seemed to have shown an improvement, but in fact confirmed the negative trend in the US labor market. With the end of enhanced unemployment insurance program, the resulting anticipated plunge in income discouraged workers to enter unemployed status and increased incentives to look for a job (terminate unemployed status). That is why continuing claims fell at one of the fastest rates in several months (from 16.7 million to 16.1 million). At the same time, initial claims also rose much less than the forecast - by 1.186M vs 1.4M forecast:

1-13.png

This suggests that supply of labor is increasing at an accelerated rate (both due to an increase in inflow and due to a decrease in outflow), bug fragile labor market will not be able to sustain a bout of supply gain, as a result, a shock of consumer spending looms. It is this argument that some doomsayers in the market are now clinging to.

The ADP data on Thursday showed that growth in the number of jobs in the US missed projection adding just 167K jobs against the forecast of 1.5M. As we discussed yesterday, the market is likely poised to see negative surprise in NFP, but if the report points to job cuts outright, stock bulls may finally lose their temper. The interim strengthening of USD, which we see on Friday, may be a tactical rally thanks to those who boost USD exposure out of precaution, believing that weak NFP can be a trigger of sell-off. Therefore, if such expectations are not confirmed, in my opinion, we can expect renewed bearish pressure in USD.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 73% and 76% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.